Rejection By Review Of Political Economy

Rejection Letter By Steven Pressman
Dear Robert,

I have now received back two referee reports on your paper "Some Capital-Theoretic Fallacies of Austrian Economics". Unfortunately, neither of the referees liked your paper and both recommended that I reject the paper.

Given the two reports, I have no choice but to turn down your paper. Enclosed are the comments that I received from my referees. I hope that they are helpful to you in revising this piece and getting it published elsewhere.

Best wishes, Steve

One Referee Report
This paper revisits the Cambridge Capital Controversies (CCC) by presenting an internal critique of "Hayekian triangles" illustrating the existence of reswitching in Austrian capital theory and its importance for Austrian Business Cycle Theory (ABCT). On the basis of this criticism, it declares ABCT to be inadequate and in need of serious revision, if not outright rejection.

The strengths of this paper are that it revisits an important victory of early Post Keynesian/NeoRicardian economics and illustrates that the points raised then have not been addressed by recent Austrian writings on ABCT, even by some smart and well-read people, such as Roger Garrison. In the second half of the paper (starting page 10), the author goes on to give a capable demonstration of this failure, and (briefly) argues that the tired old defense that "no actual instances" of capital-reversing "have ever been identified" is an inadequate response -- theoretically or empirically. That these errors are still made by Austrian (and I might add Neoclassical) economists suggests that the lessons of the CCC remain unlearned. For this reason there is indeed value in raising these points again (As an aside, I would venture that only one or two of my economist colleagues could even tell you what the CCC was, much less recount its importance for the Neoclassical theory of income distribution, but I digress).

My problems with the paper are three-fold. First, I found the introduction both too lengthy and not lengthy enough. This is indeed a paradox, so let me explain. While I have not done so lately, I once spent a great deal of time reading and teaching the Reswitching literature, and I found this lengthy review to be somewhat hard to follow. The reason is that it was (as the author admits) rather one-sided, but consequently it seemed to jump from point to point. But, simultaneously, these ten pages were also too brief and too abstract to inform someone who has only a passing acquaintance with the issue and its most important debates and findings. As a consequence, these less informed readers might be inclined to "turn the page." My point is that the introductory material was too short to satisfy those of us who know this literature and would like a review, but too long to help someone understand it if they do not already know it. My suggestion would be to cut out much of the first half and simply start with Section 3 (page 10) and position the paper as a "Research Note", and simply reintroduce it as a more narrow contribution, for example a critique of Roger Garrison or Hayek. Those interested will jump in, those who are not will skip over it, but the fairly unproductive first half can then be reduced to some references to the core literature (Harcourt or Garegnani, etc.)

Second, I found the algebraic examples to be, I believe, overly difficult to follow. Why were the units expressed in 49ths? That is a hard number with which to conduct long division in one's head! This presents a barrier to a reader who wishes to puzzle through the examples in the Tables. Was there a rationale for this choice? If so, please state it. If not, please simplify the treatment so as to invite the reader to follow the narrative and better learn from the examples.

Third, and perhaps most distressingly, I am not convinced that the overall presentation is all that original. Perhaps I am misinformed in surmising this, and I am willing to be corrected. But I must confess that I did not get the sense that this paper showed me a new angle or insight on the reswitching theorem or its implications. Now, that does not in itself doom this paper, but I do think that it means that it needs to be "repackaged", perhaps along the lines suggested above in my first criticism -- that is to say as a narrower and more specific project, without the lengthy preamble, and making a simple and direct critique of recent Austrian writings on Capital Theory and the ABCT.

Other Referee Report
The paper attempts to show by counterexample that Austrian Business Cycle theory is false. The counterexample is a model in which the interest rate is exogenous and marginal adjustments in response to the interest rate are impossible by assumption. The paper reaches its climax when the author shows that an important remark of Austrian economist Roger Garrison does not hold in the paper's model economy. Garrison's remark is:

"In response to a policy-induced reduction of the interest rate, one leg of the triangle (measuring the stage dimension of the structure of production) lengthens; the other leg (measuring the final output of the production process) shortens. The forced saving, i.e. the reduced output of consumption goods allows for expansion of the early stages of production. This is pure malinvestment."

Garrison could be wrong. But the context for the remark is an economy in which the interest rate is endogenous and marginal adjustments in response to the interest rate are possible. It is legitimate to restrict one's attention to two discrete techniques for an individual enterprise and ask which is preferred under different assumed interest rates. That exercise reveals the theoretical possibility of re- switching. But it is not legitimate to force Garrison's discussion of malivestment into that box.

I couldn't understand the author's model economy. Table 2 was a complete mystery to me. It is true that if iron and steel produce iron and steel, then it is not so clear what "order of good" means. But I cannot understand how the author divides his two output into (apparently) and infinite rank of orders.

The Austrians insist that "waiting" has two dimensions, time and money. He (she or they) even quote Hayek saying as much way back in 1941. I don't see that Austrian notion reflected in the paper's analysis, however. As well as I can make out, Cohen and Harcourt's toss off remark that Yeager didn't know what he was talking about is taken to settle the issue.

I think the Austrians are far more vulnerable on capital theory that they recognize. Thus, I would welcome a strong challenge to Austrian capital theory. If a strong challenge was mounted in this essay, it was beyond my ability to grasp it.